Southern Company Dividend Stock Analysis

Southern’s Stock Dividend Safety And Much More!

Let’s work through a Southern Company dividend stock analysis.

Southern (NYSE: SO) was one of the first stocks I bought in 2003. That’s the year I took my first steps to build a dividend stock portfolio. On the other hand, I have not added to that position in Southern stock since early 2018.

Furthermore, the company has encountered operating challenges in recent years.  So, I like to keep an eye on the security of the large dividend that Southern stock pays investors.

And while I’m at it, look at other relevant stock metrics for the company. Let’s dive right in…

southern dividend stock analysis

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

Southern Company Dividend Stock Analysis: Key Takeaways

Let’s hit some critical questions about Southern stock and its dividend upfront. As key takeaways from the rest of the article.

Then get into the details of Southern’s stock and its dividend. That supports my conclusions.

And before you go…

be sure to visit our dividend investing article archives

There you will find more than 100 posts. Full of information to help improve your dividend investing skills.

Is The Southern Company Dividend Safe?

Southern Company’s dividend metrics and business fundamentals are not very different from other regulated utilities. But, the company’s debt load and cost overruns on big expansion projects have been troubling in recent years.

On the other hand, I believe the dividend to be safe from a reduction in the foreseeable future. But, there is some risk.

I also checked with the Utility Forecaster investor newsletter. Their proprietary dividend safety score is relatively low for Southern Company.

The Utility Forecaster score does not mean the dividend will be cut. It just means it has more risk than many of the other 200+ stocks with dividends that they monitor.

Is Southern Company A Good Investment?

I think Southern Company can be a good investment. But, what do I mean by that?

What I mean is this. Southern stock fits well with certain investment objectives.

Specifically, an investor’s desire for current income plus low but consistent growth of that income. Coming from dividend increases by a steady, stable dividend growth stock.

The stock has a very nice dividend yield and low single-digit percentage dividend growth. Looking forward, I expect the dividend to grow at a similar rate as it has in the last several years. These are the makings of a good dividend stock.

Southern operates in a steady industry with predictable demand. On the other hand, they have had significant operating challenges and cost overruns related to their expansion projects.

As previously discussed, the dividend does not appear to be at risk of being cut in the near future.  However, it is one of the more risky dividend payouts of the regulated utilities covered in my model dividend growth stock portfolio.

Is Southern Company Stock A Buy?

For my purposes, Southern stock is not a buy.

This is partly due to its size in my portfolio of hand-picked dividend growth stocks (too big). Furthermore, the stock’s valuation. Finally, the combination of current dividend yield and growth profile.

I intend to hold my position, but monitor company performance more closely than I do with most of my dividend stocks.  I have no interest at this time in adding to what is already a large holding in my portfolio.

If I were inclined to add to my position, I would look for a price that equates to at least a 4.5% dividend yield. I want a higher dividend yield because of Southern’s slow dividend growth. Also, its risk profile.

As is usually the case with a dividend growth stock, higher dividend yields come with more risk and lower projected dividend growth.  And, the Southern Company dividend is no exception to this rule.

Now, let’s dig into some of the details about Southern. The company’s stock. And the stock’s dividends.

Related: Duke Energy dividend stock analysis

Southern Company Background

Southern provides energy to customers in the United States through:

  • Electric operating companies
  • Natural gas distribution companies
  • A generation company serving wholesale customers in all states across American

Furthermore, Southern Company is a nationally recognized provider of energy solutions, as well as fiber optics and wireless communications. 

Source:  Southern Company – About Us

Service Territories

The company’s service territories are focused in the Southeastern and Mid-South United States. 

Perhaps you are a customer and do not even know it.  I am a Nicor Gas customer.  Until I wrote this article, I didn’t know they were a subsidiary of Southern Company.

It’s a circular process.  I pay my gas bill and some of those profits fund my quarterly Southern Company dividend!

Major Subsidiaries

Some of Southern Company’s major subsidiaries include:

  • Alabama Power
  • Atlanta Gas
  • Central Valley Gas Storage
  • Chattanooga Gas
  • Georgia Power
  • Jefferson Island Storage & Hub
  • Mississippi Power
  • Nicor Gas
  • Pivotal LNG
  • Southstar Energy Services
  • Southern LINC Wireless
  • Southern Power & Southern Telecom
  • Virginia Natural Gas

Taken together these subsidiaries service millions of customers across the territories they cover.

Based on customer count, Southern is one of the largest regulated utility companies in America.  And most of their earnings come from state-regulated businesses.

Slow, Steady, Stable Stocks

A major appeal of regulated utilities is higher predictability and lower investment risk.

Regulated utilities are some of the most stable stocks for your investment dollars. If you like investing in slow and steady stocks, regulated utilities usually fit that profile.

This assumes the regulated utility has positive relationships with the state regulatory bodies in its service areas.  And Southern has historically maintained excellent regulatory relationships.

Southern Company Business Risks

In contrast, Southern does have some business risks to consider.

Specifically, Southern has struggled with cost overruns from the construction of two new nuclear power plants. These plants are referred to as Vogtle and Kemper.

Because of the costs related to bringing these projects to completion. The company has had to take on significant amounts of debt. And high debt-loads are typically not a good sign for consistent dividend income from stock investments.

More on the company’s financial position a little later.

Southern’s Stock Symbol

Finally, Southern stock trades on the New York Stock Exchange. Using the stock symbol SO (NYSE: SO).

I buy and sell my dividend stocks on the Webull app. You can learn more about the Webull app here.

Webull is fast and easy to use. Also, its trading tools and stock research capabilities are excellent.

Next, let’s move on to the dividend facts and figures. In other words, Southern Company’s dividends fully explained.

Southern Company’s Dividend Rate

Southern’s stock pays an annual forward dividend.

What does the annual forward dividend mean?

It is the company’s last approved dividend payment. Multiplied by the number of times each year dividends are paid.

By taking the forward dividend. And then dividing it by the stock price. We get dividend yield…

Southern Company Dividend Yield

I prefer investing in stocks that yield between 3% and 5%. Southern typically falls in this range.

Sometimes the yield is higher when the stock price has fallen. But rarely is it lower than 3%.

How Often Does Southern Company Pay Dividends?

Southern’s dividend payment frequency is every 3 months or 4 times per year.

In What Months Does Southern Company Pay Dividends?

Southern pays dividends in the following months: March, June, September, and December.

What Is The Ex-Dividend Date For Southern Stock?

For an investor to receive Southern Company’s next dividend payment, they need to complete their purchase of Southern stock before the ex-dividend date. The stock’s ex-dividend date is around the 15th day in the MONTH PRIOR TO when it pays its dividend.

To use an example, for the December dividend payment, the ex-dividend date is approximately November 15th.

Depending on how the calendar falls each quarter, the ex-dividend date can vary. As does the exact dividend payable date.

So, it’s best to check Southern’s investor relations website. And get the precise dividend dates and payment calendar.

Southern Company Dividend History

Southern is a company with a long, rich dividend history. In a recent press release announcing the next dividend payment, I took note of this statement by the company.

Every quarter for more than 70 years Southern Company has paid a dividend to its shareholders that is equal to or greater than the previous quarter.

Consecutive Years of Southern Dividend Increases

Furthermore, Southern Company has a nice streak of annual dividend increases.

Specifically, the company started increasing its dividend in 2002. And has increased it every year since then.

Is Southern Company A Dividend Aristocrat?

Dividend aristocrats are those special companies that have increased their dividend payments to shareholders for at least 25 consecutive years.

So, the answer is no. With fewer than 25 years of consecutive dividend increases, Southern is not yet considered a dividend aristocrat.

But it’s clear to me that Southern has a very sound dividend policy. And an excellent dividend history.

Let’s see what Southern’s dividend growth rate looks like next.

Southern Dividend Growth

As shown in table 1, dividend growth has been slow and steady.  This is exactly what you would expect from a regulated utility.

Table 1: Southern Co. Compound Annual Dividend Growth Rate

1 Year3 Years5 Years7 Years
 3.1% 3.3% 3.2% 3.3%

As I said before, regulated utilities have some of the most stable stocks. And, the most consistent stocks you can find.

Okay. That concludes the dividend review portion of this article.

Next, let’s see what some of the business fundamentals look like next. Then I can come up with my dividend growth forecast.

Historical Revenue Trend

Southern’s organic revenue gains come primarily from population growth. And economic development in their service territories.

In addition, Southern Company and AGL Resources completed a merger in 2016.

Chart 1: Southern Co. 7-Year Revenue Trend

Southern Company stock analysis: revenue

Under the merger agreement, AGL Resources became a new, wholly-owned subsidiary of Southern Company.  The merger added to revenue growth in 2016 and 2017.

In recent years, revenues showed a noticeable decrease. According to the company, “The full-year decrease was primarily due to lower fuel costs and a sales decline resulting from milder weather and COVID-19”. Then revenues have subsequently recovered.

Southern Company Dividend Payout Ratio & Earnings Per Share

Earnings have been pressured in recent years by cost overruns at the Vogtle and Kemper expansion projects.  This has led to a Southern Company dividend payout ratio bouncing around 100% based on earnings per share.

This is the long-term historical view. As Southern has improved its cost controls over the last couple of years.

Improving their dividend payout ratio. A positive sign.

Chart 2: Southern Company 7-Year Earnings and Dividends Trend

Southern Co. dividend payout ratio

Management believes core (adjusted) earnings will grow in the mid-single-digit percentages each year.  This seems quite good for a regulated utility.

But, it is only after eliminating cost estimates to complete the Vogtle and Kemper expansions. And, adjusting for one-time impacts from mergers and acquisitions.

Southern Company Dividends Versus Free Cash Flow

dividends are paid from cash flow

Southern’s free cash flow usually runs negative.  For most mature companies, free cash flow is positive. And exceeds the dividend.

Then dividends are paid from free cash flow. Leaving some extra cash the company can deploy as it sees fit.

In Southern’s case, their operations have to be heavily financed with external funds.  They have done this primarily by taking on debt.  And have also sold additional shares of stock to bring in cash.

This is not an ideal situation. But fairly typical for a regulated utility.

Why is that? Because utility stocks have large capital expenditures. These costs are what create negative cash flow. And the need for external financing.

Both Duke Energy and American Electric Power also have negative free cash flow. So, earnings are usually a better indicator of dividend-paying capacity. At least for regulated utility companies.

It is typical for regulated utilities to borrow large sums of money to support their operations and cash needs. They can do this because of the predictability of demand for their products and services.

But due to the high debt load, let’s pay particular attention to the company’s financial position. To see if it supports ongoing dividend payments and their safety.

To do so, I want to look at Southern Company’s balance sheet and credit rating next.

Financial Position

The table below shows Southern’s debt to equity ratio.

Table 2: Southern Company’s Historical Debt To Equity Ratio

YearRatio
20161.8
20172.0
20181.6
20191.5
20201.5
2021 (Q3)1.6

A large increase in debt occurred in 2016.  This was partly to fund the merger with AGL.

It’s good to see financial leverage decreasing in 2018. Then holding steady in subsequent years.

The balance sheet is not in as bad of shape as I thought it might be.  To be fair, Wisconsin Energy Group’s debt to equity and Dominion Energy’s debt to equity are not too dissimilar.

Credit Rating

Southern Company has an “investment grade-moderate credit risk” rating from both Moody’s S&P.

Table 3: Credit Rating Evaluation Grid

Credit rating evaluation grid for each major rating agency
Southern’s dividend is supported by investment-grade credit ratings.

Southern’s ratings are a little lower than a typical dividend stock, but also not as bad as I thought they might be. They are consistent with other utility companies.

Furthermore, many of their subsidiaries carry debt. And have stand-alone credit ratings. In general, the subsidiaries have better ratings than the parent company.

On a side note. It’s a good idea to keep an eye on your own credit score. You can do so fast, easy, and free using Credit Karma.

Southern Company Dividend Growth Forecast

Based on my analysis, I conclude that this company’s dividend is safe and will continue to grow. My projection is for a 2%-4% annual dividend growth rate in the coming years.

I’m assuming management will be able to increase core earnings by mid-single-digit percentages each year. Consistent with their guidance.

This combination of earnings and dividend growth will allow the dividend payout ratio to drift lower. A lower dividend payout ratio is a positive metric. It provides support for a safe dividend going forward.

Next up, is Southern stock valuation. Then, I will conclude.

Southern Company Stock Valuation

Let’s judge the value of Southern Company stock in several ways:

  • Southern Company dividend discount model
  • Stock price to earnings ratio
  • Morningstar fair value estimate

As I think about the different valuation measures, I conclude that Southern Company stock is slightly overvalued.

My opinion is based not on typical valuation measures. But primarily on the current combination of dividend yield and projected dividend growth. The two, taken together, are not enough for me to get excited about the stock’s value.

Most importantly, valuation measures can change quickly. What I reference below is at the time of this article update.

For the latest dividend metrics. And a good call on current valuation. I use the Simply Investing Report & Analysis Platform.

Nevertheless, let’s check out the valuation methods I just mentioned…

Southern Company Dividend Discount Model

The single-stage dividend discount model considers several factors I have discussed thus far.

  • The current annualized dividend payment
  • Projected dividend growth
  • My desired annual return on investment

Using these assumptions, the dividend growth model formula suggests Southern stock is overvalued.

Southern Stock Price to Earnings Ratio

The Southern Company stock price to 2021 earnings sits in the mid to high 20s. This is not significantly out of line with other regulated utility stocks. But pretty pricey to me for such slow potential growth.

Morningstar Fair Value

Next, the investment analysis firm Morningstar believes Southern Company stock is fairly valued at $64 per share.

Southern Company Dividend Stock Analysis: Wrap Up

Southern holds a large position in my portfolio.  At the time of writing it is in my top 10 largest holdings. So, I like to keep a close eye on it.

I consider it a long-term buy-and-hold stock with a good dividend yield. A little more dividend risk than I prefer. But a steady, reliable source for high dividend income. And low, but consistent dividend growth.

Further Reading About Slow And Steady Stocks Like Southern Company

My Favorite Dividend Investing & Finance Resources

Author Bio, Disclosure, & Disclaimer: Please join me (Tom) as I try to achieve my goals, find my next place to live, and make the most of my money. But understand, I am not a licensed investment adviser, financial adviser, real estate agent, or tax professional. I’m a 50-something-year-old guy, CPA, retired finance professional, and part-time business school teacher with 40+ years of DIY investing experience. I’m just here because I enjoy sharing my findings and research on important topics. However, nothing published on this site should be considered individual investment advice, financial guidance, or tax counsel. Because this website’s only purpose is general information & entertainment. As a result, neither I nor Dividends Diversify can be held liable for any losses suffered by any party because of the information published on this blog. Finally, all written content is the property of Dividends Diversify LLC. Unauthorized publication elsewhere is strictly prohibited.

I own Southern stock and collect the Southern Company dividend.